The Cost Of Being Inactive With Your Savings

The Cost Of Being Inactive With Your Savings

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Lots of savers think inflation will leave them better off

Inflation, inflation, inflation. It’s all you seem to hear about in the news over the last 6-9 months. How exactly does inflation impact the cost of being inactive with your savings? It’s quite subtle but has a real impact. It doesn’t de-value your cash savings but it does impact their purchasing power. If you have say £2,000 saved away in an emergency fund and let’s use say milk as an example of inflation. Milk inflation in this example is 10% from one month to the next. And before it was £1 to buy a pint of milk. Now it’s £1.10. This means the purchasing power of your £2,000 has lessened as you cannot buy as much milk as before.

Quite a niche example but hopefully it makes sense.

Off the back of that, if your savings aren’t earning a good return, you can actually be losing money over time. More than a quarter (26%) are unsure about the impact of inflation on their finances. Despite cash paying virtually no interest and inflation rising sharply, millions of savers (64%, or 10.3 million) have done nothing with their money. In reality, over the long run, half of all savers (54%) presently hold their money in cash.

Ways to put your savings to work

If this tendency continues for the following five years, the total cost of being inactive with your savings in such an environment might be £18 billion[2]. Savers presently hold £136 billion in Cash Individual Savings Accounts (ISAs), with interest rates averaging 0.26% per year[3].

Many people are unaware that inflation is eroding millions of pounds in low-interest accounts. While keeping some cash in the bank for an emergency fund is crucial, individuals may wish to examine alternative methods to make their money work harder.

Let’s look at 3 smart tips to protect your hard earned money from devaluing with inflation. To help protect against the cost of being inactive with your savings.

#1 Figure out how much you need to have in your emergency fund

As a general guideline, attempt to cover your critical costs for three to six months, or whatever you can afford. For example, bills such as energy, mortgage, rent, travel, and food expenditures, so that if the unexpected occurs, you will be prepared. And you’ll know exactly how much money you need to maintain in cash (which is affected by inflation), so you can start saving any surplus money in inflation-proof methods.

#2 Make sure you’re getting the best return on your savings

Make certain that any financial savings you have are earning the maximum potential interest rate. Savings accounts and ISAs may now be switched reasonably simply. If you do discover a higher rate, keep in mind that it might change fast. Cash ISAs, for example, are frequently offered at high rates for the first year. After the first year, these rates can decline considerably. Set a reminder to keep an eye out for any new savings rates you come across.

#3 Invest your way out of inflation or top up your pension

It’s critical to consider the long-term impact on pension payments, as well as the compounding impacts of investment. Consider supplementing your pension or investing in a Stocks and Shares ISA. It’s reasonable that you’re concerned about the future at this point, but the important thing to remember is that investing is for the long run.

You can balance out the ups and downs of market volatility and economic uncertainty with time on your side. And, if you’ve established an emergency fund, investing your money is one of the greatest strategies to avoid inflation. You may increase your fortune while protecting its worth by investing your money.

In times of turbulence, it’s key to seek professional advice

We’ve looked at the cost of being inactive with your savings and a few tips to help you get around that. But it can be quite difficult to manage and confront moving around big sums of money on your own. The decision to tackle your finances is no light one. That’s where we can help you and provide you with financial advice and guidance on your savings and when it comes to investing them and also looking at a pension.

Let us take the stress and confusion out of it with fully impartial advice from our extremely experienced financial advisor Tony. He’s managed clients investments, savings and pensions for over 35 years and is on hand to help make it clear for you today. All you need to do is get in touch.

[2] This is based on 10,303,247 Cash ISA savers with median savings of £7,231 stalling their investment decision. The total savings amount is projected over five years at a Cash ISA rate of 0.26%, allowing for a 6%, 7% and 8% rate of inflation per annum. This results in an erosion of value of £18 billion, £21 billion and £23 billion over a five-year period. [3] As at January 2022, average interest rate for instant access Cash ISAs: https://www.which.co.uk/news/2022/01/a-month-on-from-the-base-rate-risehave-savings-rates-improved/

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Tony Hollom
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